banner2 Predatory Lending Addressed in R.I.

 

 


Predatory lending bill pending in Rhode Island

Bill would protect consumers from unusually expensive loans

The real estate industry has done well during the last five years thanks to housing prices that have reached record levels. The lending industry has done well, too, as they have arranged to help consumers pay for these expensive houses. Creative types of mortgages have made it possible for nearly anyone to find a way to buy a house.

While it’s great that Americans of all walks of life are able to own a home, the problem of predatory lending has also grown considerably during the last five years. The term has no specific meaning, but generally applies to lending practices that either add large or questionable fees to home loans or those which charge interest rates that are substantially higher than average.

While there is some flexibility in interest rates and fees based upon the borrower’s particular credit score, predatory lending is a practice that seeks to take advantage of borrowers who may not qualify for better rates.

The state of Rhode Island has become the latest state to take on the issue, as it is one of only two states in New England that does not protect consumers from predatory lending.

The new bill, which seems quite similar to the North Carolina predatory lending law, would prohibit any of the following:

  • Requiring that the borrower purchase insurance from the lender as a loan requirement.
  • Refinancing a home in a way that benefits the lender only. This practice is known as flipping, and it involves having an owner repeatedly refinance a house in order to generate fees for the lender. The refinancing usually does not benefit the borrower in any way.
  • Adding points or fees into the cost of the loan, thus hiding their true cost by having the borrower pay for it over 30 years.
  • Charging prepayment fees for paying off the mortgage early. High prepayment penalties often prevent borrowers who have high interest rates on their loans from refinancing at a lower rate. The fees can often run in the thousands of dollars.
  • Other practices designed to encourage a buyer to default on a loan so that the lender can repossess the property.

More and more states are passing predatory lending laws, as the lenders who offer such loans tend to pick on the poor and on members of minority groups. Often, lenders provide such loans with the intention of taking the property, rather than funding it. The loans are so heavily loaded with interest and fees that the lenders know ahead of time that the borrowers will likely default. Once that happens, the lender can resell the property at a profit.

These laws do a good job of protecting consumers, but they may soon be rendered moot, as a Federal predatory lending law being discussed in Washington may, if passed, supersede any existing state laws, even if the state laws are more restrictive. The outcome of that law, known as the Responsible Lending Act, proposed by Bob Ney, R-Ohio, is not yet known. But it may be the latest attempt by Congress to pass a law supporting big industry while having a name suggesting that it protects consumers.
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